Investing News

With six months of
economic and market
data since the end of QE,
we assess the latest
round of the program that
ended in October 2014.
We focus on the Fed’s dual
mandate to promote low
and stable inflation and
maximum employment.
We give the Fed a pass
on the unemployment
rate, but have to assign a
failing grade on its
progress with inflation.

A lack of liquidity
continues to plague
the bond market, as
indicated by elevated
dealer holdings of
long-term bonds and
light trading volume.
Volatility may remain
elevated in the
short term.
Knowing your
breakeven can help
bond investors assess
how resistant their
current portfolio is to
rising interest rates,
and identify areas that
offer value.

With six months of
economic and market data
since the end of QE, we
assess the latest round of
the program that ended in
October 2014.
We focus on QE’s impact
on the banking and
financial sector, by
examining the amount of
financial stress in the
system, which overall has
decreased since the
beginning of QE in
November 2008.
We give the Fed a “pass”
on QE as it relates to
banking and financial
system stress.

This week we pay tribute
to David Letterman’s last
Late Show with our own
top 10 list: the top 10 keys
for stocks.
A potential snapback in
the U.S. economy is the
number one issue for the
stock market, but here we
list nine other issues that
will be important in
determining where stocks
go in the near term.

Unlike the taper
tantrum, which was
driven by fears over the
end of Fed stimulus, the
current pullback is
being driven by a
position imbalance in
our view.
Lower-rated bond
sectors have fared best
during the pullback.
A lower allocation to
bonds overall may still
be warranted, given the
lack of opportunity and
reduced protection
offered by still
historically low yields
and high valuations.

The S&P 500 is on track
to post year-over-year
earnings growth of about
2% in the first quarter — a
solid result considering the
significant drags from the
oil downturn and strong
U.S. dollar.
Healthcare led the upside,
followed by energy,
technology, and financials,
while industrials struggled.

While wage growth has
been tepid recently, 67
industries have seen
wages increase at double
the average (21% per
annum), with good old
American know-how roles
well represented.
The April employment
report suggests wage
growth likely remains a
concern for Fed
policymakers as they
debate when to begin
raising rates.
Our view remains that the
Fed may begin to hike
rates in late 2015.

We believe emerging
markets (EM) score well
when evaluated along
some of the same
criteria that NFL football
teams use to assess
potential draft picks:
speed, strength, value,
upside potential,
and character.
According to our
evaluation, EM scores
very well on the first
four metrics, and the
fifth — character — is
sufficiently discounted
in terms of policy
and corporate
governance risks.
EM may make a good
draft pick to add to
your portfolios.

Europe bond weakness
spilled over to the U.S.
as investors look past
week domestic data
and forward to a better
second half of 2015.
Fading U.S. dollar
strength, better growth
in Europe, and the
rebound in oil prices
point to a reversal of
the lower inflation
expectations that
powered bond strength
for most of 2014 and
early 2015.

Since the peak in oil
prices in June 2014,
consumers saved
some, spent some on
nonessential items,
and paid down some
debt, even as
measures of consumer
sentiment soared.
The big drop in
gasoline prices has not
provided a big lift to
the consumer sector,
which continues to
struggle in this
recovery, nor did it
change the overall
tepid trajectory of
consumer spending.

First quarter economic
weakness will likely
get plenty of attention
this week, when the
initial estimate of Q1
2015 GDP is expected
to confirm tepid growth
during the quarter.
We continue to expect
that the FOMC will
begin to raise rates in
late 2015, when it is
“reasonably confident”
that inflation will move
back to its 2%
objective over the
medium term.
Economic performance
since the end of the
recession has varied
widely by state, with
oil playing a key role.

Investors continued to
embrace risk this past
week as the Nasdaq
reached a new high
while peripheral
European bonds and
emerging market
equities rallied.
Regional economic
growth continues to
diverge but slowly moves
ahead, largely pushed by
internal demand and
supported by liberal
monetary policy.

Foreign buying of U.S.
bonds has slowed over
recent years but
remains a firm source
of demand in the
domestic bond market.
Foreign purchases are
likely to continue to
take a backseat to
economic growth and
Federal Reserve
interest rate
expectations as a
driver of bond prices
and yields.

The Russell 2000 Index
hit a fresh all-time high
last week (on tax day,
April 15, 2015) and has
outpaced large caps by
205 basis points (2.05%)
year to date.
Although valuations are
on the high side, the
factors that have driven
recent small cap
strength, in our view,
remain largely intact.
Small cap technicals
appear bullish,
with positive relative
strength and an upward
sloping 40-week
moving average.​

The latest Beige Book
suggests that the U.S.
economy is still growing
at a pace that is at or
above its long-term trend,
and that some upward
pressure on wages is
beginning to emerge.
Optimism regarding the
economic outlook far
outweighed pessimism
throughout the Beige
Book as it has for the

Bonds started the
second quarter on a
weak note as investors
anticipate economic
improvement during
the second quarter.
However, bond market
pricing indicates the
Fed may never get back
to “normal” and that
rates will remain lower
for longer.
We expect yields to
start to move higher
in the second quarter,
but until more clarity
develops, bonds yields
may drift at the
lower end of their
recent range.​

The market continues to
expect that global GDP
growth will accelerate in
2015, 2016, and 2017,
aided by lower oil prices
and stimulus from the BOJ
and the ECB, two of the
three leading central
banks in the world.
The prospect for another
year of decelerating
growth in emerging
markets remains a
concern for some
investors, who may still be
waiting (in vain) for China
to post 10 – 12% growth
rates, as it consistently did
during the early to
mid-2000s.

Regardless of whether
China hits its 7% GDP
target for Q1, its stock
market has already been
positive so far this year.
Despite strong recent
performance, Chinese
stocks may see
further gains.
We maintain our positive
view of broad EM, with a
preference for Asia.

We believe the solid Q1
2015 broad bond
market performance is
unlikely to be
sustainable for the
duration of the year.
The development of
a range-bound
environment may
slow returns in the
coming months.​

First quarter 2015
earnings may produce
the first year-over-year
decline since the
financial crisis due to
the drags of low oil
prices and the
strong dollar.
Results for S&P 500
companies may exceed
dramatically reduced
expectations.
We continue to expect
earnings to drive stock
market gains in 2015,
as we stated in our
Outlook 2015: In Transit,
and we see better
earnings prospects as
the year progresses.​

Examining the number of
mentions of certain
buzzwords across news
stories, we see a pattern
of spikes that are
followed by consistent
declines over time.
While these buzzwords
come and go, earnings
and earnings guidance
are near constants in
news stories — as they
are the ultimate drivers
of equity prices.​

The sharp increase in
new municipal issuance
has been driven by
issuers refinancing
existing debt, making
the recent surge far less
of a risk to the market.
We do not see recent
new issuance changing
the favorable
supply-demand
underpinning the
municipal bond market.

The Final Four of the 2015 NCAA College Basketball Tournament is set with
Kentucky, Wisconsin, Duke, and Michigan State headed to Indianapolis to determine
this year’s college hoops champion. In that spirit, we share our own Final Four for
stock market investing:

We continue to expect the
broad economy could
potentially create
between 225,000 and
250,000 net new jobs per
month in 2015.
Although job growth has
improved, wage inflation,
an important measure of
labor market health, is not
yet back to “normal.”
A more robust pace of job
growth should coincide
with an upturn in wage
inflation, yet the
relationship between the
two has been mixed over
the past 30 years or so.

A snapshot of
LPL Financial Research’s
views on equity, equity
sectors, fixed income, and
alternative asset classes.
This biweekly publication
illustrates our current views
and will change as needed
over a 3- to 12-month
time horizon.

The high-yield energy
sector has kept pace
with the broader
high-yield bond market
in 2015 even as oil prices
weakened, a notable
difference from 2014.
Although we don’t
believe the high-yield
bond market will return
to the June 2014 peak,
the current yield spread
may still represent good
value given still strong
corporate fundamentals
and low defaults.

Using intermarket
analysis is important to
reduce the risk of
missing vital directional
clues within the
financial markets.
Recently, a strong U.S.
dollar has created
headwinds for the
euro, crude oil, and
commodity-sensitive
emerging markets.

The outcome of last
week’s FOMC meeting
confirmed our long-held
view that the Fed would
keep rates “lower
for longer.”
A report that may have
been overlooked by
financial market
participants last week is
the LEI, which is designed
to predict the future path
of the economy.
The LEI suggests the risk
of recession in the next
12 months is negligible
(4%), but not zero.

The Fed faces a number
of obstacles now and
may require greater
justification to suggest
raising interest rates as
soon as June.
Bond market reaction to
recent Fed meetings has
been initially bearish but
muted overall.
Maintaining the word
“patient” could have
different implications
for segments of the
bond market.

What the FOMC says, if
anything, about the rising
dollar and its implications,
could have ramifications
for monetary policy over
the next several quarters
and beyond.
In addition to “when,”
market participants may
start asking “how much”
and “how fast” rates may
increase once the Fed
begins to raise the rates.
We are watching several
factors to gauge when the
Fed may begin to hike
rates, including wages,
the output gap, inflation,
and inflation expectations.

The current bull market
celebrates its sixth
birthday today
(March 9, 2015).
Bull markets do not
die of old age, they
die of excesses, and
we do not see
evidence of excesses
emerging today.
Some of our favorite
leading indicators
suggest the economic
expansion and bull
market may continue
through the end
of 2015.

January 2015 was the
best month for
high-quality bonds
since December 2008.
In February 2015,
high-quality bonds
posted their worst
monthly performance
since June 2013 and
the taper tantrum
sell-off.
High-yield bonds
experienced ups and
downs thus far in 2015.
After a muted January,
high-yield bonds
returned 2.4% in
February, the largest
single month gain since
October 2013.

The Nasdaq Composite
just hit 5000 today as
this report was going to
press and is nearing its
all-time record closing
high of 5048.
Even with the Nasdaq
at 5000, we do
not believe stocks
have reached
bubble territory.
The Nasdaq has a much
stronger foundation
today of valuations,
profits, and sentiment.​

We do not expect the
weakness witnessed in
2013, but a difficult
February 2015 thus far
warrants another look
at assessing interest
rate risk, especially
given the likely start of
Federal Reserve (Fed)
interest rate hikes later
this year.
Sector allocation,
maturity exposure, time
horizon, and whether
interest income is
reinvested or simply
spent, all influence
potential total returns
during a potential bear
market for bonds.

We continue to expect
housing may add to GDP
growth in 2015 and for
the next several years,
as the market normalizes
following the severe
housing bust of
2005 – 2010.
Poor weather in Q1 2015
may again cause housing
to be a drag on growth
early in 2015.

The market’s continued
ascent has caused
some to ask if the stock
market reflects
excessive optimism.
The pace of economic
surprises as measured by
the Citigroup Economic
Surprise Index suggests
expectations remain
reasonable.

Puerto Rico municipal
bond price volatility
picked up following the
strike down of the
restructuring law, as
the market began to
price in the prospect of
a broader default.
The impact on the
broader municipal market
is still limited, as has
been the case for much of
the past 18 months.
Default risk for Puerto
Rico remains but we still
find the broader municipal
bond market attractive.

We are watching
several key factors to
assess the potential
opportunity in the
energy sector.
While we expect to try
to take advantage of
opportunities in this
group in short order, we
are not convinced that
it now presents a great
entry point.
We continue to
recommend the
consumer discretionary
sector, where suitable,
as a way to play low
energy prices.

The market continues to
expect that global GDP
growth will accelerate
in 2015 and 2016, aided
by lower oil prices and
stimulus from two of the
three leading central
banks in the world.
The consensus has been
raising its estimate for
2015 growth for developed
economies and sharply
lowering its estimate for
emerging markets.

The negative bond yield
club is exclusively
comprised of European
issuers reflecting the
ongoing deflationary
environment, poor
growth expectations,
euro currency risks, and
negative overnight
borrowing rates at
selected central banks.
Overseas-based bond
investors may have
several reasons to
purchase bonds with
negative yields, but, to
no surprise, none of
those are compelling
enough for U.S.-based
investors.​

look at some of the
highlights and lowlights
of fourth quarter
earnings season.
Despite the massive drag
from the energy sector
and the negative impact
of a strong U.S. dollar,
fourth quarter 2014
earnings are on track to
exceed prior estimates.

Although it is too soon
to gauge the
effectiveness of QE in
the Eurozone, key
readings and data are
beginning to show
improvement, and
consensus expectations
are for continued
growth in 2015.
However, market
participants looking for
an immediate and
sustained response by
the Eurozone economy to
QE may be disappointed.

A soft start for the U.S.
stock market in 2015
once again illustrates
the diversification
benefit of high-quality
bonds even at very
low yields.
Even in a low-yield
environment, bonds
provide a cushion as
price movements, not
yields, are the primary
buffer to equity
movements.
An allocation to core
bonds, in addition to
more attractively
valued high-yield
bonds, may make sense
for investors.

The stock market fell in
January, causing some to
ask whether the so-called
January effect means
that stocks will fall
this year.
Recall less than four
weeks ago the “first five
days” indicator sent a
positive stock market
signal for 2015.
We always put
fundamentals first when
forecasting stock market
direction—and on that
score, we believe stocks
still look good.

The market is expecting
the economy to add
235,000 net new jobs in
January 2015 and for the
unemployment rate to
remain at 5.6%.
Other measures of the
health of the labor
market — hiring rates, the
quit rate, the
unemployment rate, and
most importantly,
wages — still show that
the labor market is not yet
back to normal.

We are initiating a master limited partnership (MLP) view (neutral/positive) and
introducing several new alternative investment categories.
Upgrading technology and industrials to positive and munis (int.) to neutral/positive.

The latest leg up for the
U.S. dollar has been
driven by anticipation and
arrival of QE by the ECB.
The dollar has been
strong for a number of
reasons, all of them
good things.
Though not the end all
and be all, currency is an
important consideration
when determining
asset allocation.

The pace of growth in the
global economy is a key
driver of global earnings
growth, and ultimately,
the performance of global
equity markets.
The IMF raised its
estimate for growth in
2015 for developed
economies and sharply
lowered its estimate for
emerging markets.

The ECB is widely
expected to announce a
Fed-style outright
government bond
purchase program
this week.
A large and bold plan
may arrest the rise in
global government bond
prices, but anything else
may reinforce the record
low-yield environment.

The latest Beige Book
reflected a picture of the
U.S. economy that was
largely unaffected by
concerns over dropping oil
prices, the 2014 holiday
shopping season, global
growth scares, and a
rising U.S. dollar, although
the drop in oil prices was
noted as a negative in
some districts.

The much anticipated
European Central Bank
(ECB) policy meeting this
week may include a
quantitative easing (QE)
program announcement.
Although we would view
a potentially bold QE
program from the ECB as
an incremental positive,
the ongoing growth and
deflation challenges in
Europe leave us still with
a strong preference for
the U.S.

We find it premature to draw conclusions
regarding oil prices and the performance of the
broad high-yield bond market.
Default rates, the pace of economic growth,
and the strength of credit quality metrics
among high-yield issuers — not oil prices — will
be the primary drivers of high-yield bond
market returns.

While the certainty provided by an election
outcome has been positive for the stock
market over time, our positive stock
market outlook is based much more
on fundamentals.
It does not get more fundamental than
earnings, which are on track to grow by 10%
year over year for the second straight quarter.
Earnings season is not over, but with about
90% of S&P 500 companies having reported
results, we are ready to declare it a success.

The drop in gasoline prices over the fall and
summer months has been a plus for spending,
but other factors have a much bigger impact
on the consumer.
The better tone to the labor market, the sharp
rise in household net worth, and prerecession
levels of consumer confidence all act as
supports for the consumer.
However, stubbornly weak wage and income
growth remain as key constraints on spending.
Sustained economic growth is the best way to
ensure solid employment growth.

The headwinds of rising high-quality bond
yields and increasing new issuance have
slowed the advance of high-yield bonds in late
October 2014, relative to stock market gains.
Nonetheless, we expect high-yield bonds may
improve as economic expansion, earnings
growth, and low defaults continue to drive our
positive outlook.
We continue to expect a challenging, lowreturn
environment across the bond market,
with high-yield bonds a likely bright spot.

It is important to recognize that the S&P 500
is not GDP. S&P 500 companies have different
drivers for earnings than the components that
drive GDP.
The backdrop of solid business spending within a
slower trajectory of overall GDP growth can be a
favorable one for the stock market.
Although stocks are at the low end of our target
10–15% S&P 500 return range for 2014, we see
further gains between now and year end as likely,
with profit growth as a primary driver.

The Fed ended its bond purchase program last
week and the bar has been set fairly high for
restarting more QE.
The economy is in far better shape today,
compared with the start of QE in 2008 and
the end of QE1 and QE2.
It is probably too soon to know if QE has
“worked,” and the better question may be, can
the U.S. economy stand on its own without QE?
We believe the BOJ and ECB are likely to do
more QE.

The Fed will end outright bond purchases this
week, barring any surprises from this week’s
Fed meeting.
The end of bond purchases should not create
much market reaction, as bond investors
focus more on global economic growth and
expectations for interest rate hikes.
The Fed’s breakup will not be a clean one as it
maintains a steady influence in the MBS market.

The U.S. economy is improving, and in
many cases is back to normal, but it remains
stubbornly weak in some areas.
“Real world” indicators that point to the
health of the economy include crane rental
rates and customer traffic in restaurants.
Economic uncertainty — likely a drag on
economic growth in 2011, 2012, and 2013 — has
faded as a concern in 2014, consistent with the
Fed’s most recent Beige Book.​

We remain confident in corporate America’s
ability to generate solid earnings growth in the
current global economic environment despite the
slowdown in Europe (and to a lesser
extent, China).
A number of U.S. companies have performed
relatively well in Europe, with some not yet
seeing signs of a slowdown in their business.
The business environment overseas appears
to be good enough for companies to largely
maintain their outlooks for the rest of the
year and into 2015.

Yields may remain low for evidence of any
fallout or contagion to the U.S. economy; a
stretch of stronger economic data or bolder
action by overseas central banks are likely
needed catalysts for higher yields.
The on-guard mentality in the bond market
has pushed back timing for Federal Reserve
interest rate hikes.

We believe the oil sell-off is overdone and expect
the commodity to find a floor in the low $80s.
We expect firming global growth to increase
the market’s confidence in global oil demand
despite weakness in Europe.
Energy service stocks are particularly oversold
and may be attractive as the services-intensive
U.S. energy renaissance continues.

The latest Beige Book reflects a picture of the
U.S. economy that has, thus far, been largely
unaffected by current geopolitical headlines.Optimism regarding the economic outlook far
outweighed pessimism, as it has for the past
18 months or so.

We see the recent increase in volatility as normal
within the context of an ongoing bull market.
We do not believe the age of the bull market, at
more than 5.5 years old, means it should end.
We maintain our positive outlook for stocks for
the remainder of 2014 and into 2015.

The pace of growth in the global economy
is a key driver of global earnings growth,
and ultimately, the performance of global
equity markets.
Global GDP growth in 2014 remains on track
to accelerate versus 2013’s pace, and the
consensus is forecasting acceleration in global
growth in 2015.
Potential growth headwinds in 2015 include...

A challenging bond market environment will
likely persist over the remainder of the year
and perhaps beyond.
Valuations across many bond sectors remain
above historical averages and reflect an
expensive market.
We believe corporate bonds may provide
investors with the best defense in what will likely
be a continuation of the low-return environment.

Earnings season is here and may counteract
the negative headlines with another
dose of positive fundamental news.
We expect the third quarter of 2014 could
produce another good earnings season, which
we believe may positively impact stocks.
While there are some headwinds, Europe
in particular, the U.S. economic backdrop is
supportive and profit margins should remain
high, given the few signs of cost pressures.

The nation’s fiscal situation has improved
dramatically in the past five years due
to overall economic improvement and a
combination of higher tax rates and modest
spending increases.
However, structural and demographic
problems that will drive the deficit over the
next several decades remain in place.
If policymakers continue to ignore critical
warning signs, the near-term improvement in
the budget picture is unlikely to last.

We continue to expect housing may add to
GDP growth in 2014 and for the next several
years as the market normalizes following the
severe housing bust of 2005 – 2010.
Housing affordability and supply, and the
supply and demand for home mortgages, will
likely determine the pace at which housing
increases GDP growth in the years ahead.
The inventory of new and existing homes for
sale as a percentage of total households has
never been lower.

The yield curve has a perfect record in
signaling recessions over the past 50 years.
One of our “Five Forecasters,” the yield
curve tells us that a recession and significant
market downturn are likely a ways off.

A change of seasons should be noted by
municipal investors, as a seasonal increase
in new issuance may be a catalyst to lower
returns after a strong 2014.
It is not uncommon for revenues to slow as
the economy matures, and we do not view the
slowdown in state tax revenues as worrisome
for municipal bond investors.

Last week we discussed why buying
European stocks now, following the recent
stimulus announced by the ECB, is very
different from buying U.S. stocks during
periods of Fed stimulus in recent years.
This week we take a deeper dive into the
investment opportunity in Europe and evaluate
fundamentals, valuations, and technicals.
We recommend that investors “fight the ECB.”
We do not believe the additional stimulus
is enough for us to recommend European
equities over U.S. equities at this time.

The key now for the Fed, as it deliberates
when to begin to raise rates, is to gauge how
quickly the output gap is likely to close.
The pace at which the U.S. economy
takes up slack is likely to command a great
deal of attention from the Fed and market
participants in the coming months.
We believe the first Fed rate hike is likely to
occur in about a year’s time, assuming the
economy tracks the FOMC’s forecast.

Despite recent weakness, bonds continue
to discount the pace and magnitude of Fed
rate hikes.
A few facets of this week’s Fed meeting may
reveal whether the recent pullback in bonds
continues to stabilize.​

Buying stocks after the various QE programs
were announced by the Federal Reserve was
generally a profitable decision for investors.
To answer the question about whether
the ECB programs will have the same
impact on European stock markets, we
point out some key differences between
the United States then and Europe now.

We continue to expect the Fed to again cut
its bond purchase program and remain on
pace to exit QE by year end.
However, odds have increased that the Fed
could change “something” at this week’s
FOMC meeting, including omitting its
promise to keep rates low for a “considerable
time” or providing the public with an update
to its exit strategy.
We are continuing to watch...

The combination of additional cuts to overnight
borrowing rates and the announcement of the
ABS purchase program was slightly more than
expected from the ECB.
Bond markets sent growth signals in response
to ECB action in the form of higher yields, higher
inflation expectations, and a steeper yield curve.​

We believe the “three Rs” are keys
to the outlook for the stock market:
revenues (and profits), reinvestment,
and the renaissance in manufacturing.
We expect stocks to garner support from
these three Rs in the form of continued
growth in revenues and profits, more
corporate reinvestment, and continued steady
gains for the U.S. manufacturing sector.

Over the past three Beige Books, the BBB
has averaged +100, the highest reading over
any three consecutive Beige Books since at
least 2005.
The latest Beige Book indicates to us that the
negative headwinds that have held the U.S.
economy back over the past seven years may
finally be abating.
Health care and the ACA have remained a
consistent source of concern among Beige
Book respondents, although the impact has
faded a bit recently.
Despite the recent barrage of bad news on...

Although the decline in US Treasury yields has
been significant in 2014, it is not quite at an
extreme when viewed historically.
However, the decline in European government
bond yields has reached an extreme.
Given the influence of European government
bond yields on U.S. yields, this week’s ECB
meeting may determine the market’s next move.

The market is not expecting the ECB to begin
QE this week, although other forms of policy
support are likely.
The data continue to suggest that more aggressive
monetary policy from the ECB would have only
a muted impact on the real economy unless the
fractured banking system can be repaired.
Policy divergences among the world’s major
central banks are likely to intensify in late 2014
and beyond.

The resolution of election uncertainty — and
ending the predominantly negative rhetoric
surrounding the campaigns — has historically
been a positive for the stock market.
We continue to see opportunities for further
stock market gains over the course of 2014,
based upon fundamentals rather than the
potential for sweeping legislative change.

Historically, bond yields have begun to move
more forcefully four to six months ahead of a
first rate hike from the Fed.
We believe the rise in interest rates may begin
sooner this cycle due to lower yields and more
expensive valuations.
We favor capitalizing on year-to-date bond
strength and recommend a defensive posture
consisting of short to intermediate bonds.

The first rate hike by the Fed has never been
an indication of a market peak.
On average, the first rate hike has taken place
37% into the economic cycle (measured peak
to peak).
The S&P 500 has returned on average,
another 58% after the first rate hike (price
return) before the market peak for the
economic cycle.
The initial market reaction to a rate hike is, on
average, negative, but the data show it pays to
be invested.

Geopolitical risks powered bonds to another
weekly gain, but historically such gains have
been short-lived and given way to other
fundamental drivers.
Low volume summer trading may keep bond
yields pinned near year-to-date lows over the
near term.

Our fastest growing exports are not always as
visible as some of the items we consume and
import daily.
Most major service export categories have
experienced near 10% growth per year for the
past 10 years.
Good Old American Know-How is our most
abundant resource.

The strength of European government bonds
has supported demand for US Treasuries due
to more attractive yield differentials.
European influences may continue over the
near term, but we expect U.S. bond yields
to reconnect to domestic economic data in
coming months.

The United States has a trade surplus in
the service sector, where we are creating
relatively high-paying jobs.
Many U.S. service-related jobs require
advanced degrees and advanced skills, and
help to make possible our booming business
in service exports, much of it tied to Good
Old American Know-How.
Our competitive advantage in the service
sector should help to continue to drive
employment higher in this sector, especially
in areas that require advanced skills.

Volume has picked up during the recent downturn. No, we are not talking
about trading volumes; we are talking about the volume from your TVs with
talking heads warning about an impending stock market downturn. If you
turn off the TV and focus on what the market is telling you, rather than the
talking heads, you can tune out the noise.

Losing under 3% in a week seems a minor
concern given historical market ups and
downs; nevertheless, investors may begin
to wonder if stock market valuations are
signaling a decline.
Since the end of the last significant sell-off
for stocks, the market has been in a pretty
consistent upward trend.
Valuation is a poor market-timing
indicator; while valuation should always
be considered, it is a blunt tool that
should be taken into broader context.

With the release of the GDP figures for the
second quarter of 2014 (along with revisions
to the data back to 1999), the disconnect
appears to be fading.
The data released so far for the third quarter
suggest that the underlying economy had
decent momentum as the third quarter began.
The data continue to suggest that the U.S.
economy is poised to post growth in the
second half of 2014 above the long-term run
rate of the economy.

Futures continue to indicate the bond market
believes the Fed does not have an ace up its
sleeve and that ultimately they will not raise
rates as high as they project.
A host of top-tier economic data may influence
bonds more this week given the absence
of new forecasts and a press conference
following this week’s Fed meeting.

Amid the barrage of nearly constant economic and market data, nothing is
more important to assess the health of corporate America than the quarterly
check-in that we affectionately call earnings season. As earnings season
approaches its halfway mark, it’s a good time to take a look at what we’ve
learned so far.

Only nine times in over 14 years have the
FOMC meeting, GDP report, ISM report, and
the employment report — all often marketmoving
events — occurred in the same week.
Historically, these weeks have exhibited 20%
more volatility than an average week over this
time span, as measured by the S&P 500 Index.
This week is unlikely to be just another boring midsummer
week for financial market participants.​

The latest edition of the Fed’s Beige Book
indicates that the negative headwinds that
have held the U.S. economy back over the
past seven years may be declining.
The rebound in our Beige Book Barometer
over the past several months is consistent
with the Fed’s view that the drop in economic
activity was mostly weather related.
Despite the recent barrage of bad news,
optimism on Main Street remains high...​

If a tax holiday is enacted and the repatriated
funds by multinational corporations are used
to buy back shares or retire debt, it could
potentially act as a very potent market stimulus
equivalent to the height of the Fed’s QE3.

We do not expect the municipal bond market
to repeat first half strength over the second
half of 2014.
A gradual rise in yields to compensate for
better growth, a modest rise in inflation, and
the start of Fed rate hikes in roughly one
year’s time will likely pressure bond prices
slightly lower through year end.
We continue to believe the taxable bond
market is likely the main catalyst to the next
move in municipal bond prices.

A common worry among investors is that the
stock market may fall as the Fed gets closer
to hiking rates. In fact, the S&P 500 has
posted a gain in the 12 months ahead of the
first rate hikes over the past 35 years.

Global GDP growth in 2014 remains on track
to accelerate versus 2013’s pace, excluding
the impact of the weather.
The pace of growth in the global economy
is a key driver of global earnings growth,
and ultimately, the performance of global
equity markets.
In our view, markets may already be looking
ahead to the second half of 2014, and
especially the third quarter, to gauge the true
underlying pace of global growth.

We continue to expect that U.S. economic
growth may rebound to a 3% pace for all of 2014.
The June 2014 jobs report was undeniably
strong on all fronts, standing in sharp contrast
to the weak performance of the economy in
the first quarter of 2014.
The last time the economy created at least
200,000 jobs per month for five consecutive
months was in late 1999 through early 2000,
when the U.S. economy was growing between
4.5% and 5.0%.

After broad based strength over the first half of
2014, we expect yields may rise in the second
half of 2014 as global growth strengthens and
inflation picks up from recent lows.
Higher valuations have increased the
challenges facing investors.

Similar to a farming
almanac, our Investor’s Almanac is a publication containing a guide to
patterns, tendencies, and seasonal observations important to growing.
The goal of farming is not merely to grow crops, but to sustain living
things — investing shares the same goal.

Just as the World Cup has been heating up,
increasing the risk of player mistakes, the
world consumer price index (CPI) has also
been heating up, complicating the task for
policymakers at the world’s central banks and
increasing the risk of mistakes that could have
market implications.

Despite the Fed labeling the recent inflation
increase as “noise,” longer-term bond yields
rose, inflation expectations increased, and the
yield curve steepened — all signs of the bond
market pricing in inflation risks.
As the low inflation pillar of year-to-date bond
strength fades, it may be one more reason to
be cautious in the bond market.

The U.S. economy is poised to outperform
Germany in the years ahead thanks to better
demographics, better productivity, and a more
focused central bank.
Today the U.S. economy is in far better shape
than the German economy. Advantage U.S.A.

We believe bank loans could be one of the
more attractive fixed income asset classes
based on our economic and market outlook
for the second half of 2014 and believe recent
negative headlines are misplaced.
A still low interest rate environment, a
growing economy, and strong demand for
floating rate debt have all fueled growth in the
bank loan market.

We continue to expect the Fed to trim QE by
$10 billion per month this year and to remain
on pace to exit QE by the end of 2014.
Our view remains that the current center of
gravity at the FOMC will likely err on the side
of keeping rates lower for longer.
Markets should expect that the Fed will be
content with keeping its fed funds rate target
near zero until key labor market indicators
make significant progress toward “normal.”

Strong economic data has weighed on bonds
to start June but favorable yield differentials
between Treasuries and European
government bonds have helped limit the
domestic bond weakness.
Divergent central bank policies may still mean
bonds yield to growth.

At the heart of it, all markets come down to
buyers and sellers. Taking a look at who is
buying and who is selling can tell us something
about the durability of the market’s performance
and what may lie ahead.

The latest edition of the Fed’s Beige Book
indicates that the negative headwinds that
have held the U.S. economy back over the
past five years may be declining.
The rebound in our Beige Book Barometer
is consistent with the Fed’s view that the
contraction in economic activity was mostly
weather related.
We continue to expect...

Investor positioning and changed Federal
Reserve expectations had a particularly
beneficial impact on robust bond market
performance in May.
Unbalanced investor positioning may have run
its course, and investor expectations about the
Fed may be as good as it gets.

As markets brace for this week, we continue
to expect that the U.S. and global economies
may accelerate in 2014 relative to 2013’s
growth rate.
We continue to expect that the FOMC will
taper QE by $10 billion per meeting, exit the
program by the end of 2014, and begin to raise
interest rates in late 2015.
Our view remains that...

We do not think the economic weakness in Q1
is the start of another recession, and, indeed,
we continue to expect real GDP will expand
3.0% in all of 2014.
We believe the conditions are in place for a
pickup in business spending, and we expect
the pace of business capital spending to
accelerate over the next several years.

Limited new issuance and Treasury market
strength have powered municipal bonds to
their best start since 2009.
In conjunction with lower yields and higher
valuations, near-term caution may be warranted
as the first signs of selling pressure emerge and
a challenging seasonal period looms.
Absent a new bout of economic weakness, we
see additional municipal price gains as limited.

We do not think the first quarter GDP report will
be a harbinger of a recession in the near future.
We continue to believe the U.S. economy will
accelerate in 2014 (relative to 2013), and that
GDP will increase 3.0% for the year.
The LEI indicates that the risk of recession in the
next 12 months is negligible at 4%, but not zero.

If Godzilla-sized quantitative easing aligns with a
fading impact from recent tax hikes, increasing
political support for corporate tax cuts, and
a push by government pension funds into
stocks, it may mean a blockbuster summer for
Japanese stocks.

The volatility we call “market storms” is likely to continue to be a
characteristic of markets this year, caused by well-known factors, such as:
geopolitical conflict in Russian border countries, slower economic growth
in China, or a weak start to the year for the U.S. economy, among others,
but also lesser-known factors like the Oklahoma earthquakes, solar flares
disrupting communications, and the Ebola outbreak...

While the dollar may gain ground in the coming
months and quarters as the economy accelerates,
we continue to believe the dollar will slowly
depreciate over time — continuing the trend that
has been in place since the early 1970s.
The weaker dollar has, at the margin, made our
exports more attractive, pushed up the costs of
goods we import, and, most importantly...

Key emerging market central banks have
raised rates within the past year in an effort
to combat inflation, the threat of inflation, or
current account imbalances.
Most developed market central banks are on
hold or easing.
The divergence among global central bank
policies creates both risks and opportunities for
global investors, and especially active managers
who invest globally.

There is no better time to take a fresh look at your investment strategies than the beginning of the new year. And while there is no one-size-fits-all approach to investing for the future, reviewing your goals annually can help you stay on track from month to month--and year to year.

As 2013 draws to a close, the last thing anyone wants to think about is taxes. But if you are looking for potential ways to minimize your tax bill, there’s no better time for planning than before year-end. And, with the higher rates put in place with the passage of the American Taxpayer Relief Act of 2012, being tax efficient is more important than ever.

Because you have worked hard to create a secure and comfortable lifestyle for your family and loved ones, you will want to ensure that you have a sound financial strategy that includes trust and estate planning. With some forethought, you may be able to minimize gift and estate taxes and preserve more of your assets for those you care about.

If you’re like many Americans, you probably intend to rely on your employer-sponsored retirement plan savings for a significant portion of your retirement income. So when it comes time to make important decisions, such as what to do with the money in your plan when you change jobs or retire, you should be fully aware of your options...

If you’re currently investing for your children’s college education or are planning to do so in the near future, you may want to consider a state-sponsored prepaid tuition plan. Generally speaking, these plans, which are now available in many states, allow you to pay tomorrow’s tuition bills at today’s tuition rates. In addition...

As interest rates spiked in the second quarter of this year, many bond investors shifted gears from intermediate and long-term bonds to bonds with shorter maturities. The relationship between interest rates and bond prices is just one of many potential risks associated with bond investing. So why consider bonds?

The loss of critical personnel can be life threatening to small businesses; however, it's a risk that life insurance can often mitigate. In fact, life insurance policies are frequently used in plans aimed at making it possible for a business to survive a change of ownership or the loss of a partner, the chief executive or an employee whose creative talent, technical knowledge or salesmanship drives the business...

The continuously shifting investment climate, the sheer number of investment products to choose from and the emergence of employee-driven retirement savings plans, such as 401(k) plans, have all contributed to the increased need for qualified financial advice. No matter what your level of investment experience or sophistication, you may benefit from developing a relationship with a financial advisor...​